Deferred Tax Footnotes

• Components of Income before Tax

– Domestic vs. Foreign
• Components of Income Tax Expense
– Currently payable vs. Deferred
• Reconciliation from Statutory to Effective Income Tax Rates
– Permanent differences
• Components of Deferred Tax Assets and Liabilities
– Temporary differences and Valuation Allowance
• Differences between Footnote and Balance Sheet
– Deferred tax assets and liabilities may be netted by jurisdiction on the balance
sheet
– Deferred tax assets and liabilities may be split into current and noncurrent
portions

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Disclosure Example
• Moth Inc. manufactures construction equipment
• Questions to answer from Moth’s Income Tax footnote:
– What is the effect of Moth’s non-US subsidiaries on its 2012 effective tax rate?
– Provide a summary journal entry for 2012 Income Tax Expense
– Provide the journal entry for the change in valuation allowance during 2011. Why
did Moth make this entry? What effect does this entry have on net income?
– Was Moth’s warranty expense for tax purposes higher or lower than its warranty
expense for book purposes in 2012?
– Was Moth’s depreciation expense for tax purposes higher or lower than its
depreciation expense for book purposes in 2012?

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Footnote 6: Income Taxes
Reconciliation of the U.S. federal Year ended Dec. 31 • Effect of non-US
statutory rate to effective rate: 2012 2011 2010 subsidiaries on
U.S. statutory rate 35.0% 35.0% 35.0%
2012 ETR
(Decreases) increases in taxes from:
Net operating loss carryforwards (0.4) (2.1) (1.0) – Increased ETR by
Benefit of Foreign Sales Corp. (4.4) (3.2) (2.8) 1.9%
Non-U.S. subsidiaries taxed – Represents extra tax
at other than 35% 1.9 (0.5) 1.4 on the same pre-tax
Other-net (0.1) 1.4 0.4 income
Provision for income taxes 32.0% 30.6% 33.0% – Permanent difference

We paid income taxes of $306, $714, and $709 in 2012, 2011, • For tax calculations,
and 2010, respectively. we will use
statutory rate: 35%

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Footnote 6: Income Taxes
(millions) Year ended December 31 • Journal entry for 2012 Income
Profit before taxes: 2012 2011 2010 Tax Expense
U.S. $1,050 $1,880 $2,071
Non-U.S. 371 294 342 Dr. Income Tax Expense 455
$1,421 $2,174 $2,413 Cr. Deferred Taxes 65
Provision for income taxes: Cr. Income Tax Payable 390
Current tax provision:
U.S. Federal $179 $471 $571
Non-U.S. 190 102 103
State (U.S.) 21 45 54
390 618 728
Deferred tax provision (credit):
U.S. Federal 81 93 60
Non-U.S. (25) (55) 7
State (U.S.) 9 9 1
65 47 68
Total provision $455 $665 $796

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Footnote 6: Income Taxes
(millions) Year ended December 31 • Journal entry for 2012 Income
Profit before taxes: 2012 2011 2010 Tax Expense
U.S. $1,050 $1,880 $2,071
Non-U.S. 371 294 342 Dr. Income Tax Expense 455
$1,421 $2,174 $2,413 Cr. Deferred Taxes 65
Provision for income taxes: Cr. Income Tax Payable 390
Current tax provision:
• More detail?
U.S. Federal $179 $471 $571
Non-U.S. 190 102 103 Dr. Income Tax Expense 455
State (U.S.) 21 45 54
390 618 728
Deferred tax provision (credit):
U.S. Federal 81 93 60
Non-U.S. (25) (55) 7
State (U.S.) 9 9 1
65 47 68
Total provision $455 $665 $796

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Footnote 6: Income Taxes
(millions) December 31,
• Deferred Tax Assets
Deferred tax assets and liabilities: 2012 2011 2010
Deferred tax assets: – Debit of 120
Postemployment benefits $1,044 $1,032 $1,107 • (1916 – 1796)
Warranty reserves 237 194 159 • Deferred Tax Liab.
Unrealized profit 167 179 201
– Credit of 175
Net operating loss carryforwards 170 83 76
• (521 – 346)
Inventory valuation method 93 78 62
Other 205 230 233 • Valuation Allowance
1,916 1,796 1,838 – Credit of 11
Deferred tax liabilities: • (72 – 61)
Capital assets (383) (263) (177)
Pension (138) (83) (99) • Cr. Def Taxes 65 =
(521) (346) (276) Dr. DTA 120
Valuation allowance for DTAs (72) (61) (129) Cr. DTL 175
Deferred taxes — net $1,323 $1,389 $1,433
Cr. Val Allow 10

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Footnote 6: Income Taxes
(millions) Year ended December 31 • Journal entry for 2012 Income
Profit before taxes: 2012 2011 2010 Tax Expense
U.S. $1,050 $1,880 $2,071
Non-U.S. 371 294 342 Dr. Income Tax Expense 455
$1,421 $2,174 $2,413 Cr. Deferred Taxes 65
Provision for income taxes: Cr. Income Tax Payable 390
Current tax provision:
• More detail?
U.S. Federal $179 $471 $571
Non-U.S. 190 102 103 Dr. Income Tax Expense 455
State (U.S.) 21 45 54 Dr. Deferred Tax Assets 120
390 618 728 Cr. Deferred Tax Liabilities 175
Deferred tax provision (credit):
Cr. Valuation Allowance 10
U.S. Federal 81 93 60
Non-U.S. (25) (55) 7
State (U.S.) 9 9 1
65 47 68
Total provision $455 $665 $796

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Footnote 6: Income Taxes
Reconciliation of the U.S. federal Year ended Dec. 31 • Cash paid for
statutory rate to effective rate: 2012 2011 2010 income taxes
U.S. statutory rate 35.0% 35.0% 35.0%
– $306 in 2012
(Decreases) increases in taxes from:
Net operating loss carryforwards (0.4) (2.1) (1.0) • Cr. Income Tax
Benefit of Foreign Sales Corp. (4.4) (3.2) (2.8) Payable 390 =
Non-U.S. subsidiaries taxed Cr. Cash 306
at other than 35% 1.9 (0.5) 1.4
Cr. Inc Tax Pay 84
Other-net (0.1) 1.4 0.4
Provision for income taxes 32.0% 30.6% 33.0% • (390 – 306)

We paid income taxes of $306, $714, and $709 in 2012, 2011,

and 2010, respectively.

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Footnote 6: Income Taxes
(millions) Year ended December 31 • Journal entry for 2012 Income
Profit before taxes: 2012 2011 2010 Tax Expense
U.S. $1,050 $1,880 $2,071
Non-U.S. 371 294 342 Dr. Income Tax Expense 455
$1,421 $2,174 $2,413 Cr. Deferred Taxes 65
Provision for income taxes: Cr. Income Tax Payable 390
Current tax provision:
• More detail?
U.S. Federal $179 $471 $571
Non-U.S. 190 102 103 Dr. Income Tax Expense 455
State (U.S.) 21 45 54 Dr. Deferred Tax Assets 120
390 618 728 Cr. Deferred Tax Liabilities 175
Deferred tax provision (credit):
Cr. Valuation Allowance 10
U.S. Federal 81 93 60
Non-U.S. (25) (55) 7 Cr. Income Tax Payable 84
State (U.S.) 9 9 1 Cr. Cash 306
65 47 68
Total provision $455 $665 $796

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Footnote 6: Income Taxes
(millions) December 31,
• Journal entry for 2011
Deferred tax assets and liabilities: 2012 2011 2010
Deferred tax assets:
change in valuation
Postemployment benefits $1,044 $1,032 $1,107 allowance
Warranty reserves 237 194 159 – Decrease of $68 (61 – 129)
Unrealized profit 167 179 201 Dr. Val. Allow. (-XA) 68
Net operating loss carryforwards 170 83 76
Cr. Inc. Tax Exp. (-E) 68
Inventory valuation method 93 78 62
Other 205 230 233
1,916 1,796 1,838 • Increases Net Income
Deferred tax liabilities: by $68
Capital assets (383) (263) (177) • Why did the Valuation
Pension (138) (83) (99)
Allowance decrease?
(521) (346) (276)
Valuation allowance for DTAs (72) (61) (129)
Deferred taxes — net $1,323 $1,389 $1,433

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Footnote 6: Income Taxes
As of December 31, 2012, amounts and expiration dates of
net operating loss carryforwards in various non-U.S. taxing
jurisdictions were:
Beyond
2013 2014 2015 2016 2017 2018 2019 2019 Total
$1 $4 $8 $18 $15 $45 $45 $482 $618

A valuation allowance has been recorded at certain non-U.S.

subsidiaries that have not yet demonstrated consistent and/or
sustainable profitability to support the recognition of net deferred
tax assets. Circumstances could change in the future which
would allow us to reduce the remaining valuation allowance and
recognize additional net deferred tax assets.
In 2011, circumstances changed at certain of our European
subsidiaries which allowed us to reduce the valuation allowance
and recognize additional net deferred tax assets.

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Footnote 6: Income Taxes
(millions) December 31,
• Journal entry for 2011
Deferred tax assets and liabilities: 2012 2011 2010
Deferred tax assets:
change in valuation
Postemployment benefits $1,044 $1,032 $1,107 allowance
Warranty reserves 237 194 159 – Decrease of $68 (61 – 129)
Unrealized profit 167 179 201 Dr. Valuation Allow. 68
Net operating loss carryforwards 170 83 76
Cr. Income Tax Exp. 68
Inventory valuation method 93 78 62
Other 205 230 233
1,916 1,796 1,838 • Increases Net Income
Deferred tax liabilities: by $68
Capital assets (383) (263) (177) • Why did the Valuation
Pension (138) (83) (99)
Allowance decrease?
(521) (346) (276)
Valuation allowance for DTAs (72) (61) (129) – “circumstances changed
Deferred taxes — net $1,323 $1,389 $1,433 at certain of our European
subsidiaries”

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Footnote 6: Income Taxes
(millions) December 31,
• 2012 difference in
Deferred tax assets and liabilities: 2012 2011 2010
Deferred tax assets:
Warranty Expense
Postemployment benefits $1,044 $1,032 $1,107 – Warranty DTA increased
Warranty reserves 237 194 159 by $43 (237 – 194)
Unrealized profit 167 179 201 Dr. Income Tax Exp
Net operating loss carryforwards 170 83 76 Dr. Deferred Tax Asset 43
Inventory valuation method 93 78 62
Cr. Income Tax Payable
Other 205 230 233
1,916 1,796 1,838 – Income Tax Exp < Income
Deferred tax liabilities: Tax Payable for Warranty
Capital assets (383) (263) (177)
Pension (138) (83) (99)
(521) (346) (276)
Valuation allowance for DTAs (72) (61) (129)
Deferred taxes — net $1,323 $1,389 $1,433

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Footnote 6: Income Taxes
(millions) December 31,
• 2012 difference in
Deferred tax assets and liabilities: 2012 2011 2010
Deferred tax assets:
Warranty Expense
Postemployment benefits $1,044 $1,032 $1,107 – Warranty DTA increased
Warranty reserves 237 194 159 by $43 (237 – 194)
Unrealized profit 167 179 201 Dr. Income Tax Exp
Net operating loss carryforwards 170 83 76 Dr. Deferred Tax Asset 43
Inventory valuation method 93 78 62
Cr. Income Tax Payable
Other 205 230 233
1,916 1,796 1,838 – Income Tax Exp < Income
Tax Payable for Warranty
• Income Tax Expense < Income Tax Payable by $43 for Warranty
• Pre-tax Income < Taxable Income by $123 (43 / 0.35)
• Book Warranty Expense > Tax Warranty Expense by $123

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Footnote 6: Income Taxes
(millions) December 31,
• 2012 difference in
Deferred tax assets and liabilities: 2012 2011 2010
Deferred tax assets:
Depreciation Expense
Postemployment benefits $1,044 $1,032 $1,107 – Capital Assets DTL
Warranty reserves 237 194 159 increased by $120 (383 –
Unrealized profit 167 179 201 263)
Net operating loss carryforwards 170 83 76 Dr. Income Tax Exp
Inventory valuation method 93 78 62 Cr. Def Tax Liab 120
Other 205 230 233
Cr. Income Tax Pay
1,916 1,796 1,838
Deferred tax liabilities: – Income Tax Exp > Income
Capital assets (383) (263) (177) Tax Pay for Depreciation
Pension (138) (83) (99)
(521) (346) (276)
Valuation allowance for DTAs (72) (61) (129)
Deferred taxes — net $1,323 $1,389 $1,433

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Footnote 6: Income Taxes
(millions) December 31,
• 2012 difference in
Deferred tax assets and liabilities: 2012 2011 2010
Deferred tax liabilities:
Depreciation Expense
Capital assets (383) (263) (177) – Capital Assets DTL
Pension (138) (83) (99) increased by $120 (383 –
(521) (346) (276) 263)
Valuation allowance for DTAs (72) (61) (129) Dr. Income Tax Exp
Deferred taxes — net $1,323 $1,389 $1,433 Cr. Def Tax Liab 120
Cr. Income Tax Pay
– Income Tax Exp > Income
Tax Pay for Depreciation
• Income Tax Expense > Income Tax Payable by $120 for Depreciation
• Pre-tax Income > Taxable Income by $343 (120 / 0.35)
• Book Depreciation Expense < Tax Depreciation Expense by $343

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